Tuesday, February 10, 2009

Trying to Be Middle-Class on $500k

Okay, yesterday I couldn't face commenting on recent news stories, but I have to tackle this one:
You Try to Live on 500K in This Town

Like most readers, I can't dredge up much sympathy for anyone who thinks it's tough to get by on $500k a year, even here in NYC. But hidden within the "oh it's so hard to be rich" crap like how to budget for summers in the Hamptons and a full-time nanny lies this valid point:

[In NYC, it] takes $123,322 to enjoy the same middle-class life as someone earning $50,000 in Houston...

Let's say you have a family of 4, and you want a 3-bedroom home, and one car. You want to send your kids to a school of decent quality. And maybe you'd like the kids to play a sport after school, and you want to take the whole family to the movies once in a while. For now, just forget all the extras like vacations and keeping up with the Joneses when it comes to designer clothes and spa treatments. If you want to live in Manhattan, or even many parts of the outer boroughs and New Jersey, you absolutely need a six-figure income to afford these things-- things which people in other areas might consider the bare minimum of a middle-class life.

I did a quick search for 3-bedroom apartments for rent in Manhattan, with 2 bathrooms and 1500-2000 square feet. Those currently listed on the NY Times website range from $3,000-$20,000 a month, with most probably falling in the $8-10k range. You'd have to pay around that much in monthly costs to buy a place too. If you want to keep housing at 30% of your income, you'd have to be making over $300k a year. (Even in Manhattan, the median income is only around $64k, and the average is about $121k.)

How about the car? Forget the cost of buying it and insurance and maintenance. Let's just focus on one thing: where are you going to put it? If you want your own driveway, expect to pay more than the housing costs above. That leaves the street or a garage. If you want to drive around in circles and have to move your car twice a week even if you don't need to use it, and risk damage and break-ins, go ahead and park for free on the street. A garage can easily cost $300 a month and up.

School: New York does have some good public schools, but you can't take it for granted that you'll be able to send your kids to one of them, so many middle-class families who want their kids to get into selective colleges opt for private schools. Some Catholic schools may only charge a few thousand a year, but some charge as much as $25,000 a year, and other private schools can be over $30,000 a year. See here for an evaluation of NYC's public schools-- only about a third get an "A" for the percentage of students passing state tests. I don't have any stats for what these schools offer in terms of sports and activities, but I'm sure budgets will be cut in the coming years given our economic situation.

As for the movies, adult tickets are $12.50 and children are $9.00 these days (over 30% more than ticket prices I found for Houston). Add some popcorn and soda and you're easily looking at $75 for a night out.

Many people will read this and say "well, it's crazy for a family of 4 to try to live in NYC," and however sad that might be, they are probably right. But some people need to work in NYC-- my career options would be severely limited in other cities, because most of the publishing industry is based here. If I had kids, I'd definitely have to move further out of the city, but then I'd incur costs of $200-300 a month for a commuter train pass.

But it wasn't always so-- New York was never cheap, but it didn't used to be this out of whack in relation to middle-class incomes. Those sky-high Wall Street bonuses have been part of the reason-- the tax windfall may have helped fill the city's coffers, but I think NYC is a perfect example of why rising income inequality is a bad thing. I'm not sure salary caps are the best way to fix it, but it will be interesting to see how this might change over the next few years.

31 comments:

Anonymous said...

But the same job in Huston will earn you half the salary you earn in NYC, so it wouldn't be much difference in your purchasing power in the end.

Besides, underground trasaction such as buying food with cash in Chinatown is relatively cheaper and much more prevalent in NYC.

Miss M said...

I live in Los Angeles and the middle class dividing line here is also high in comparison to most of the country. Food, gas, insurance and housing all cost more. The median US household income is considered poverty level wages here. I still have no sympathy for the hardship of people making half a mil, but I can see how a family of four is strained on $100k per year.

Eli said...

I'm a 24-year-old living right outside NYC(in Westchester) and the cost of living here is astronomical. I work two jobs and make about 30k, and even with only a tiny amount of time off to actually spend money, I feel like I'm just scraping by. I currently take mass transit, and I can see no realistic way to afford a car right now. But I'll stick with it, try to lower my expenses and find ways to make more money.

Mike said...

Why would you need a car in NYC? There are plenty of high-income earners who don't even bother with one. But yeah, I'm expecting the economic fallout to make NYC a somewhat more equitable place to live. It's just too ridiculously expensive, but prices have this seeming inability to fall there.

noiwasntsleeping said...

I thought that living in the age of the internet meant that everybody was freed up from haivng to live in New York City. What ever happened to virtual commuting?
I can say this safely from my 2 bed/2 bath house in the midwest.

Escape Brooklyn said...

This is exactly why I'm leaving.

Tally Girl said...

Well said EB.

DogAteMyFinances said...

Your movie figures are bad -- it costs about the same to go to the movies.

However, the popcorn and every other food product in the entire city will be cheaper. A lot.

Chicago Rob said...

That's why I stay in Chicago. Chicago has much of the same options as NYC, but people making between $60-$120k/yr can live in a nice, desirable city neighborhood, for a reasonable price. I'm ok getting my theater with the second run cast. I can afford to fly to NY if it's that important!

Christine said...

Cost of living is more expensive in NYC than Houston, but the Times implies that the bank executive lifestyle was unavoidable, just part of the job. That is false, and a lot of the upper class is going to find out firsthand that nannies, drivers, vacations, and gala dresses are optional.

Anonymous said...

However, if you do move further out from the City, you no long have to pay NYC tax. All in, esp. given the cost savings in terms of cost of living, I would say it's a wash to a net positive moving out of the City. Of course, everyone's mileage will vary.

Anonymous said...

If you are looking to do any advertising for your website, check it out reading this NY cost of living is high compared to most states in the US

Laura said...

Thank you SO MUCH for this! I've been really frustrated with hearing all the reports of people saying boo hoo to the execs making $500K, because I genuinely think that in NYC, it's pretty fair. Not just from the cost perspective that you talked about, but also from a value perspective. My boyfriend is an associate at a bank, and he typically puts in 70-100 hours/week - it basically equates to a ridiculously low hourly wage if you were to calculate it. Without the promise of a high salary in the future, no one in their right mind would work in finance.

I used to work in consulting before I got laid off, and it was always interesting to me to see how ridiculously tough people thought MY job was... and I was only working about 60 hours a week! The finance world is really demanding, and I think until you've worked in it, you can't judge how much it's worth. I'd love to see some of the people who currently work strict 9-5s (with NO Blackberries going off on Saturday evenings telling you that you have to come into the office immediately!) switch to the financial services lifestyle, and THEN tell me executives are overpaid.

My rant is over - I'm happy to listen to others' opinions :)

Laura said...

One last thing - salaries in smaller cities like Houston are NOT half the salary of New York jobs. At my old job (which was entry level, so it's easy to compare), the difference between a first tier salary city (New York, LA, San Fran, Boston, Chicago - all of which are clearly not equal either) and a second tier salary city (Dallas, Atlanta, Cleveland, etc) was only about 8%.

Chad @ Sentient Money said...

@ Laura
Finance executives are over paid. I don't care how many hours someone works. I only care what they produce. In our current situation, we would have been better off if all the finance "professionals" would have stayed home and just collected their foolishly large paychecks. At least then they wouldn't have done all this damage.

I was an accountant who used to audit financial institutions, so it's not like I have no experience in this situation.

Laura said...

Chad, I think it makes perfect sense to judge people on what they produce, but I also think that the products of financial institutions take a LOT of time to produce, and therefore the people who make them should be compensated accordingly. I don't think it's at all accurate to say that the financial crisis is a result of overpaid executives sitting around doing nothing... or even having evil intentions. Sure, there are some greedy jerks out there, but I think it was a result of misspeculation across a lot of industries and people.

Emi said...

Isn't a smaller living space and no car just part of living in a denser city? I just don't think it's that good of a comparison because you may be able to get a lot more for you money in Houston but... you're living in Houston. I'm not saying that NYC isn't overpriced but a lot of the amenities you're paying for aren't tangible. I pay extra for my small apartment and forgo a car because I have different values than the folk living in the suburbs.

Lee said...

I call bullshit on the 'lots of hours = higher pay' argument for finance people. Plenty of people work huge numbers of hours and are constantly on call. What matters is value created, and how many hours you work or do not is absolutely irrelevant. As a whole finance has created trillions of dollars of negative value in the last few years, and should be compensated accordingly. Also, in normal companies your pay depends on how well the company does -- everyone is not a lone gun, so the argument that just some other department caused the problem, while yours was profitable, also doesn't hold water. At a normal company, if the marketing department does well but the technology department causes it to crash, everybody loses. If you want to be paid as lone gun, go work for yourself.

Tired of being broke said...

I think the cost to survive in NYC is all relative. You can live in NYC and not live in Manhattan. There are places in the outer boroughs that can get you to lower Manhattan for work in under an hour. These are places that are going to be wayyyyyy cheaper in terms of rent and or mortgage.

The parking garage would be $150 and not $300. I live in one of the outer boroughs, and with my car I have no problems finding parking. There are areas around me where you can get a huge house and not have your mortgage be that high. Then you will have a driveway which eliminates the need for the parking garage.

In reference to Laura's comment on executive pay, most of these guys are rediculously overpaid. It does not matter how many hours you work, alot of them are overpaid.

Laura said...

To clarify my position: it's not that I don't think executives make a ton of money... it's that I think without that kind of incentive, no one in their right mind would want to spend hours toiling over spreadsheets and financials. Without the promise of a big reward, why make that kind of life sacrifice? I have plenty of friends who are in banking (not execs though) just for a few years - their plan is to basically have no life now in exchange for retiring in 5 years to enjoy themselves later. Quite a trade off (and not one that I was willing to make, which is why I had no interest in i-banking), and one that unfortunately has not been a good gamble due to the collapse of the former i-banking model. But if someone told them they had to work all those hours and get paid a "normal" salary, they'd be out of there in a heartbeat. It's just not worth it.

Anonymous said...

I made $310,000 and $205,000 in 2008. I now earn $405 per week (roughly $20,000).

Apart from paying my mortgage, my standard of living is the same.

Anonymous said...

Laura,

Sorry, your argument is daft.

Just make two people work half the number of hours instead of paying a single person ten to hundred times as much.

Anonymous said...

Anon @ 7:02 PM,

Care to describe what you did before and after work-wise?

What about where you stay?

Some more color so we can understand how your quality of life remains the same on one tenth the income.

Anonymous said...

I am/was a wall street lawyer. Simple. I saved every dime I made. The only thing I spent money on outside investments was discretionary. Now I spend no money on discretionary expenditures. The absence of discretionary expenditures affects me very little. Thats why its discretionary. I have a rental property which is paid for by the renter. I am dipping into savings to pay my mortgage but I have substantial savings and thus it is not currently affecting me. Of course I cannot retire so i will need another job before long however I bought a house in NJ on a cheap block and can pay for it with a job making $65000 a year.

Fr years, everyone always said oh, put down at least 20% on a house or more. IMHO that is the worst advice ayone could take. If you cannot aford th payments on a house with 10% down, you should not buy that house. Minimum equity contribution is they key to prosperity, but it must be done correctly. Now those folks who put down 20% on their houses in the last 2-3 years have no equity. I refer to risk 10% equity rather than 20% equity.

Buying a house you cannot afford is your fault, not a bank's fault, no matter how predatory the banks are/were. Come on. These folk knew or should have known that they could not afford those houses.

Anonymous said...

Thanks for the response, Anon @ 1:20 pm.

How much were you able to save per year? $/% etc.

Anonymous said...

up until this year I was saving 40% of take home normally, including 401k contributions, which now as we all know I shouldnt have made. but of course, the conventional wisdom, like the Suze Ormans and Carme Wong Ulrichs of the world advised everyone to do so. I hope that the least to come out of this is that people realize that those folks care zero about you. they care about making money for themselves.

In fairness, I did buy another property in 1004 which I then sold in 2006 for a $150,000 tax free gain. I put don $20,000 on it, or10% because at the time its what i could afford. I then plowed some of that ash into my house and a rental property in 2008, wen I though incorrectly that the housing market was bottoming.

Now I collect $405 per week, soon to be $430 per week I understand, in UE and run a deficit of roughly $3000 per month and daytrade (poorly) to scrape together some income.

One thing I will say is that when I bought my properties, I calculated what it would take to have rougly a 5 year emergency fund in cash in caseI got canned, which I did (for economic reasons). Yes, 5 years. The "6 months" emergency fund advice was another nugget of stupidity, as we can now plainly see.

I am not immune to being on the street any more than the guy next door or my former secretary. That is the attutue that I think was lost on many folks in the years leading up to this debacle.

Chic Noir said...

The "6 months" emergency fund advice was another nugget of stupidity, as we can now plainly see.
For many americans under 25 and those who make very little, 6 months emergency fund was better than nothing.

Anonymous said...

agreed, but everyone should have at least a one year fund, preferably two, rather than buying $15 Chocotinis every weekend.

Fake it til you make it has got ushere.

Windy Citizen said...

Thanks for the article. I enjoy reading blogs and books on personal finance but am dismayed that most are geared to suburbanites. I live in the great city of Chicago, which, while not nearly as expensive as NYC, is still expensive compared to lots of other places in the US. I figure that the saving grace is that I don't need a car. My monthly transit pass is currently $86 (though may go up in a few months). And I get to buy it with pretax dollars, so it really costs me 25% less than that.

It would be interesting to see a spreadsheet comparing normal living costs in a dozen or so different cities.

Walter Wind Chill said...

About the idea that it is "crazy" for a family of 4 to live in a city...I disagree. There is so much that a city has to offer children, such as cultural opportunities. Would you drive 3 hours to take your kids to a world-class museum? How often--once a year? What about ethnic diversity? Don't you think it is good to show kids that there are all kinds of people in the country, with different foods and beliefs and customs? I do.

Crystal said...

Even taking into account higher pay in NY, I think the cost of living is much cheaper here in Houston, TX. My husband is a middle school teacher and I do glorified office work. We are 26 years old and make about $75,000 jointly a year, live a solid middle class lifestyle (house, fast food, restaurants, cars, etc.), and save more than 25% of our money between a pension plan, 401k, Roth IRA, and stock. Could we live the same kind of life by teaching and working in a cubicle in NY? It doesn't sound like it, but it also doesn't sound like New Yorkers even want that kind of life...it seems to balance out in the end.

BUT, $500,000 a year, even working 100 hour weeks, is almost $100 an hour ($96.15)...isn't that alot even in NYC?